Housing Bill, Part V

Where Is the Collateral?

Any government official asked to come up with a workout plan for troubled financial institutions, large portfolios of financial assets and liabilities and/or places that are financially challenged first must consider all the constituencies involved. No matter what his or her goals, an official must choose from among the options available. Before we judge them harshly, we must consider what we would do if we stood in the same shoes.

The challenge that US Treasury Secretary Hank Paulson faces when working out the problems with Fannie Mae or Freddie Mac is that a significant number of mortgages that serve as collateral for US mortgage backed securities markets are not real. They do not exist.

The problem is not that the people who bought the house and borrowed the money can not afford to pay it back or the house that they bought has dropped in value. If these were the problems, we would not be watching the debt the US government is responsible for increase by $5 trillion dollars. We would not be watching the National Bank of Australia announce a 50% loss rate on their mortgage backed securities.

When my company served as lead financial adviser to the Federal Housing Administration (FHA) we surveyed industry loss rates to compare them to FHA’s high rate of 35%. The highest we found in the industry was 25% and this was at the end of the last housing bubble bust, when loss rates would be expected to be high. As we due diligenced the FHA non performing and foreclosed portfolios, trying to understand a 35% lost rate, we started to find symptoms of fraudulent collateral practices. Indeed, we found portfolios with 50% loss rates and the losses had nothing to do with income levels or housing prices.

Here is a story that I have told many times before:

“Indeed, in 1994 after the first FHA/HUD financial audit was published, a mortgage banker came to see me. He was a serious engineering type who clearly worked hard and mastered the details of his business. He was distressed, he said. For decades he had been keeping a tally of total outstanding FHA/HUD mortgage insurance credit. He had brought printouts of his database for me. It turned out that the government’s published financial statements showed the amount outstanding was substantially less than the actual amount outstanding. He was sure. I assumed that the guy was crazy. If what he said were true, then the US Treasury and the Federal Reserve would have to be complicit in significant fraud, including securities fraud.”

After I began researching HUD fraud in the last 1990s, I would be contacted by people with experience with HUD fraud. They insisted the same home was being used to create ten or more mortgages that were placed into different pools. They alleged that Chase as the lead HUD servicer and the other big banks were implementing such systems. This was why we would see the same house default two, three or four times in a year, they claimed. You needed to churn the FHA mortgages through multiple defaults to generate the cash to keep all these fraudulent pools afloat. This, they insisted, was all going to finance various secret government operations and private agendas.

This issue of collateral fraud was repeated in other markets. As I started to learn more about precious metals and the commodities markets I would hear story after story about precious metals arrangements in which investors really had a bank credit — there was no real bullion behind the arrangement.

I have come to believe that the allegations of mortgage collateral fraud are true – not just for FHA and Ginnie Mae at HUD, but across the board throughout the mortgage markets.

What this means is that Freddie and Fannie Mae must be converted to essentially government debt. Such conversion means that investors simply don’t care if the mortgages have a real lien on anything real or not (at least for the meanwhile). Otherwise there would need to be a process by which all the defaulted mortgages can be sorted through to determine which of the mortgages are legitimate and which are not.

Creating and managing such a process would indeed crash the global financial system. It is hard for a multi- trillion dollar financial system to maintain liquidity when contracts and laws are meaningless.

The challenge for Hank Paulson is that by increasing the national debt by $5 trillion — whether collateralized by real estate or phony paper — he can delay the day of reckoning, but he can not cancel it.

There is only one thing that can cancel the day of reckoning and that is a return to productivity – a reengineering of resources in households and communities, a revitalization of culture, education and markets, a rebuilding of infrastructure, an integration of new technology and new process and a shift away from warfare, centralization, financial fraud and organized crime and those who lead and promote it.

Hank Paulson’s hands may be tied, but ours are not. Ultimately, you and I have the power to change this. So…who is your banker? Who is your farmer? Where is your money?

Read Parts I, II, III, IV, VI, VII, VIII, IX of this commentary >>>

View all parts of the article here >>>


  1. I’m going to invent my own local bank, loan money to my own local proteges as farmers, et al, and put my money where my mouth is: (I’m looking for two experienced full time partners…)
    Permaculture Investment Bank
    The following is an idea for setting up a local Investment Bank that would finance small business start-ups under a Brand such as “Permaculture Enterprise Network.” This Bank would provide training and mentoring for its borrowers, as well as an ethical basis for its businesses: “Earth care, people care, fair share,” from Bill Mollison’s “Permaculture, A Designer’s Manual”(1988). Permaculture is a way of designing place-based ecological economies. It is capable of providing sustainable water, soil, food, fuel, and shelter while generating community along the way. Permaculture is intelligence-dense and capital-light. It is a whole systems approach to designing environmentally regenerative support structures for human nurturance.
    Under the Bank’s auspices, business plans would be written by prospective owners for specialties such as rainwater harvesting, edible landscaping, firesafing, alternative energy, fertility and energy crops from marginal lands, water sequestration using earthworks for ponds, swales and keylining, aquaculture, natural building, sustainable forestry, constructed wetlands for wastewater treatment, small scale dairies, food processing and preservation: the many basic capacities that make a place prosperous –capacities that add up to real productivity and local security.
    There are many proven techniques, not difficult to master, that young people willing to work, could pick up and get good at. The Bank would sponsor the basic permaculture design certification course, an established 72-hour curriculum with a hands-on design project pass-fail requirement, which would be a prerequisite for a basic business management course in which students would learn to write, with expert coaching, the well-thought-out, customized-to-place business plan most appropriate to their abilities. The Bank would retain majority ownership and provide ongoing mentoring for enterprises selected for support until the business passed a financial assessment proving viability, whereupon, with ample cash flow, the owner could realistically buy out and become fully independent. Maintenance contracts for installed systems, since many of the techniques are new, would be a common feature offered, providing ongoing employment and developing experience until systems maintenance for these new approaches has become as familiar and mainstream as maintenance of private autos, septic systems, lawns, homes, and major appliances are today.
    The Bank, in its function as small business incubator, would provide bookkeeping and marketing services for its start-ups. These are the tasks business-owners starting out have the hardest time with. The Bank would provide training, loans for equipment (each start-up not very capital-intensive), mentoring, legal services, accounting, as well as customers for each new business. The moral support supplied by such an arrangement would be a powerful insulator against the high failure rate common to small business starts in the mainstream economy.
    The Bank, in its function as promoter of permaculture solutions, would also lobby local government to remove regulatory obstacles. It would set up specially permitted model projects to demonstrate quality standards. It would obtain economies of scale in purchasing materials and equipment. It would coordinate flows, one enterprise’s waste becoming fuel for another’s production. It would also help with allocating labor between enterprises as needed. The different specialties once launched, might form their own professional associations, interact with experts in their fields, sponsor research, and participate in developing innovations within their area of expertise.
    The Bank would be a conduit for philanthropy as well as a source of information about available subsidies and tax credits. In its function as an investment vehicle, The Bank would provide a secure home for local investors to place their money: They would own a share of locally productive, visible hard assets. In its function as holder of an ethical mission, The Bank would assure customers of its protégés high quality, reliable service. As a part of that mission, it would demonstrate financial transparency, for the purpose of building trust.
    An apprenticeship program would build local skills and provide a structure for meaningful inventiveness and culture-creation among the young. Child care services could be integrated with these activities, allowing adults in their most productive years maximum convenience and peace of mind as they work.
    In the current economy people are losing their jobs, just as a great deal of work needs to be done to get alternative support systems in place. The time for this is ripe. Due to the hole made in the mainstream economy by a falling house of cards, state and local governments, pension funds, financial institutions, even the federal government, are rapidly becoming insolvent and are already being forced to cut services. It looks like communities are going to be left on their own. Investment vehicles that only a year or two ago were fine, now seem uncertain: stocks and bonds, real estate, even bank accounts no longer seem as secure as they once were. The organization described here could start with where we are today, doing those projects which are legal, productive, and financially viable now, while remaining observant, adaptable, and open to evolutions as conditions change. It could safeguard an ethical basis for ecological human nurturance. Permaculture’s whole systems perspective is capable of revealing efficiencies which can then be designed in to effective systems for prosperity in a given place.
    The Bank would also be an appropriate venue for the creation of a LETS –Local Energy Trading System: an alternative currency. Once a community of small businesses got local production for local needs up and running, a local currency could protect an area from inflation, deflation, and other disruptions, including failures within the existing financial system. In prosperous areas, the network of businesses would be integrated with the regular cash economy, and evolve as needed. In low income areas with high unemployment, it could operate under work-trade or other types of barter arrangements.
    This is an idea that is not very hard to do, not very expensive, can start small and grow, and can end up with prosperity being built up in a climate of cooperation and self-reliance with a secure and understandable moral basis. Two or three good partners could start this with seed capital, get it flourishing, then start another Bank in a different place.

  2. Aw, c’mon. They’re just printing money and handing it out to their buddies and using black box financial instruments like this to pretend they’re working. At the top of the financial pyramid in Wall Street lies a class of people that in no way think they are, or should be, beholden to physical reality when they write their own paychecks. They invent financial instruments out of whole cloth, are loaned money from the fed based upon fictional collateral and then create sucker traps in which to lure small investors for the fleecing. Their ultimate goal was to steal everybody’s social security money and blame the little people for poor investment choices.

    The entire scheme from the Federal Reserve on down is a sucker’s game.

  3. Holy moly!

    Ms. Fitts, I want to thank you for this unbelievable series about the housing^H^H^H^H^H^H^H investment banking bailout.

    Allow me to thank you for this fine series- especially this part- as I do not recall having yet heard about something as insidious as mortgage collateral fraud.

    History shows us that society isn’t very receptive to hearing the truth. For this you are hereby (ta-DA!) commended.

    Right now I am about to press Submit and then link over to Part I to start from the beginning, as I’m hooked.

    “It is the aim of good government to stimulate production, of bad government to encourage consumption.” – Jean Baptiste Say

  4. I listened to you on C to C and tried to digest it all. You had some very good/scary things to say. I plan to study your writings more.
    Would you please be able to refer me to a site/article that would explain “hedge funds for dummies?”

  5. Catherine…thank you so much for writing about this. I know little about economics, but I’m trying to learn…bit by bit, it’s becoming clearer (hopefully). I have one question: by what mechanism was the same house mortgaged several times? Was it just the simple 2nd, 3rd, 4th, etc., mortgage? I can’t see that, because each mortgage would pay off the previous one. If numerous mortgages were sold on the same house, this would imply that whatever lending institutions were involved would know there were already other mortgages in place (from title searches). Were there no laws in place to prevent this?

    Once again, thank you for your series of articles. I hope you have time to answer my question.

  6. Catherine… I thank you for the continuing education. If correct, I think I heard, but can’t find, one of your ideas on solutions to this problem being a focus on local, community action as a way to begin replenishing the wealth that was looted at that level. Where can I start to find out more about this? [also, thank you for allowing use on my blog. the audience is growing, and I will always point people to where I get information.]

  7. Hi Catherine,
    This is such an outstanding post that really helps make sense of the degree of the problem and what’s at stake. When you’re on Coast to Coast tomorrow, if you get a chance, could you bring these non-existent mortgages up in conversation? Because I have yet to hear anyone in the media talk about this problem.

    thanks very much,

  8. Hi Catherine,

    Thank you for this wonderful post. I now know that is what my mortgage loan is called – not mortgage fraud but mortgage collateral fraud. I was told and believed I was getting a Fannie Mae Expanded Approval Timely Payments Reward Loan for 5% down, low closing and interest rate which did not happen. I was told Fannie Mae was the Investor and BOA submitted 4 applications with different addresses. I never saw them until one at closing. I could not figure out why I had all these applications with similar but different addresses. I had a Fannie Mae Rider recorded and Addendum to Note that was back-dated and none of the documents were typed on Fannie Mae forms. I find out I did not get the Fannie Mae Loan program I thought I was getting (Fannie Mae put it in writing) and the documents were recorded falsely; loan is invalid – it does not exist. The closing company got 8 major violations including title search not done properly. I have an attorney. I do not believe today that I ever had a Fannie Mae loan. I know Fannie Mae underwrote a loan for me with incorrect address but it never closed. I read Fannie Mae Alt-A loans was one of the reasons Fannie Mae went under and BOA had 28% of them. Again, thanks so much for this. I am going to read some more.


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